A Four-Step Model to Evaluate Mutual Funds: A Case-Study of Equity Mutual Funds in Saudi Arabia
16 Pages Posted: 24 Nov 2006
Date Written: November 2006
The Saudi stock market has been witnessing much volatility during the past one year and the market capitalization had come down by 50%. Mutual funds that invested in local stocks too had to bear the brunt of the over bearish trend of the market to a large extent. In the absence of well-developed debt market including corporate debt securities and the volatility that continues to prevail in Saudi stock market investment in mutual funds appears to be an alternative investment for Saudi investors provided right kind of mutual funds are picked up which are consistent with the risk-return profile of investors. However, choosing the right kind of fund is the real challenge as there are 185 mutual funds out of which 97 are equity mutual funds.
The article presents a 4-step model to evaluate the performance of mutual funds and application of the same to equity mutual funds in Saudi Arabia is illustrated. The YTD, 6-month, 1-, 2-, 3-year returns and Sharpe ratio were computed for each of the equity funds to compare their performance. Out of the six categories of equity mutual funds in Saudi Arabia, funds invested in Asian and European stocks were more consistent in their performance and yielded relatively higher returns than other categories, though funds invested in Saudi stocks yielded higher 3-year returns.
The analysis brings out the relative performance of the various funds and serves as a useful tool for taking well-informed investment decisions.
Keywords: Mutual Funds, Risk, Return, Sharpe ratio, Equity, Stocks
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